Monday, 10 September 2007

B of A's bargain is no bargain

A couple of weeks ago I posted on Countrywide Financial (CFC) expressing the belief that Bank of America Corp's (BAC) $18 a share redemption price for CFC stock was not the bargain it appeared to be. Just two weeks after that shrewd investment it seems anyone can pick up CFC stock for $18 a share and I suspect in the coming months you'll be able to get a better deal than BAC did.

Last Friday CFC announced job cuts of between 10,000 - 12,000 equating to approximately 20% of their workforce and in addition announced that origination volumes would fall 25% in 2008 from 2007. Remember 2007 profit is going to be significantly lower than 2006 before any asset write-downs and now we can expect 2008 to be lower still.

Just a couple of weeks ago CEO Angelo Mozillo stated that there was significant opportunity for Countrywide to gain market share in the consolidating prime mortgage space. However the point is that it will be a larger market share of a much smaller market.

I've said it before but it's worth reiterating, CFC's earnings in recent years are an aberration brought about by the housing bubble. They are not sustainable or even normal and may not return to these levels for a long time if at all. Whilst CFC may be the extreme case other companies in the financial sector are in the same boat.

The mistake investors make will be to think that post the current credit and housing crisis profits will return to previous levels and continue their upward march. However like all bubbles the earnings bubble needs to be deflated - that process is already underway. What hasn't been deflated yet are investors expectations and the longer they continue to ignore the signs the nastier the surprise will be.